No More Learning

In Europe post-deal residual amounts could eventually be mutualized under a “redemption pact,” while the Fund construct could be applied immediately with troubled Caribbean islands. As to Argentina’s next chapter such overhauls may come too late before the end game, which may also be signaled by likely Presidential team defeats in upcoming legislative elections heralding a post-Kirchner era.

Europe’s Baneful Banking Structures
2013 October 16 by admin

Posted in: Global Banking
The feature chapters in the IMF’s semi-annual Global Financial Stability Report focus on the mixed record of post-crisis emerging Eurozone interventions to revive small business credit in particular and of retail deposit funding reliance following parent and regulatory pushes. Weak supply and demand are due to a combination of collateral, borrower data and debt constraints, and Central and East European economies under fiscal and monetary policy limits have often turned to outside support from the EIB and EBRD. Despite the continued retrenchment in regional cross-border lending, developing market banks are better positioned than advanced peers in terms of capitalization, LTD ratio, asset encumbrance since most senior obligations are unsecured, and subsidiary-head office relations since liquidity and profit transfers can be bilateral. They can more easily meet Basel III criteria without disputes over bail-in provisions and depositor preference in the process of clarification through EU and Financial Stability Board resolution regimes guiding G-20 approaches. Many note lower government securities availability to attain ready cash requirements despite high balance sheet concentrations, and in Latin America countries like Mexico use repos and other wholesale sources more than Asian counterparts. At group level divisions between home and host supervisor mandates remain uncertain, and unsecured debt costs could rise with workout procedure changes, but ample equity endowments should “mitigate adverse impact” in the Fund’s view. Hungary and Poland still have 100 percent loan-deposit ratios as stock market losses were almost eliminated at the Q3 close. Budapest is gearing up for elections as the 2014 budget forecasts 2 percent GDP growth and a budget deficit just under the 3 percent Brussels benchmark. The manufacturing PMI is near 55 as the central bank should sustain rate cutting to 3 percent on below-target inflation. The Orban administration has also injected stimulus through a corporate on-lending scheme as it stays at odds with bank representatives over another foreign currency mortgage conversion package to reduce the 6. 5 percent of GDP burden. The forint portion could reach half under the existing exchange rate cap program as authorities try to end the mismatch altogether despite planning an estimated EUR 5 billion sovereign Eurobond pre-financing for next year.

In Warsaw in contrast floating rate home credit at 25-year maturity continues to increase 5 percent as the central bank keeps rates at the bottom indefinitely to spur domestic consumption and investment. However the economic reformers who pioneered the private pension institutional buyer base for capital markets accuse Prime Minister Tusk of Hungary-style confiscation with his recent state social security takeover proposal to keep within constitutional debt limits and reverse sagging favorability results. After cancellation of government bonds, debt/GDP will drop below 50 percent, but that level of popular approval remains remote with the opposition clearly ahead in opinion surveys. Foreign holders will be the main accounts at over one-third the total buttressed by a $35 billion IMF contingency facility to seal structural cracks.

Africa’s Multiple Affront Affirmations
2013 October 9 by admin

Posted in: Africa
Sub-Saharan African securities performance was not as scorching in Q3 after previous record sovereign bond issuance and MSCI frontier index advances, as mainstream markets regained favor and investors again turned wary over poor political and economic headlines. Islamic terrorist attacks in Kenya and Nigeria dented sentiment, although the Nairobi stock market was up 40 percent through end-September and a $1. 5 billion debut Eurobond is still in the works. The Westgate mall slaughter will hurt tourism accounting for 15 percent of GDP and multinational company East Africa hub operations as the annual growth forecast was bumped to 5 percent on inflation almost double that figure on higher VAT to close the 8 percent of GDP budget hole. The central bank reiterated its availability for shilling support in the aftermath despite a management shakeup which demoted the governor from board chair. Nigerian equities (+ 15 percent) are off from earlier gains as the ruling PDP party was embroiled in a challenge to President Jonathan’s potential run for another term in 2015 as he removed disapproving cabinet members. Oil industry reform still languishes in parliament, although privatized power facilities were handed to winning bidders, including the head of the Dangote Group who is the country’s wealthiest business executive. The sovereign wealth fund completed its first $1 billion allocation as the excess crude account balance hovers at $5 billion on a 3 percent of GDP fiscal deficit. The single-digit inflation target remains intact with the benchmark policy rate at 12 percent, as the outgoing central bank chief tightened dollar access rules with international reserves standing at $45 billion. Exchange house licenses were revoked and a biweekly Dutch auction was reintroduced and remittances can be paid only in naira. A state government offered an inaugural sukuk as the North-South religious split was reinforced with bloody Boko Haram assaults on churches and schools. Part of the proceeds from July’s $1 billion 6. 5 percent global bond will go to energy sector realignment, and despite the higher than planned cost it was 2 percent below the later maiden placement by neighboring Mozambique. Angola has put a public operation on hold as the president’s son was named to manage the SWF and the oil monopoly’s accounts were brought on budget at the IMF’s behest. 2013 GDP growth will be 7 percent on inflation around 9 percent as a new banking law goes into effect on government deposit handling.

Ghana’s shares have been aloof from the turmoil with a 45 percent MSCI jump, but public debt aided by Chinese concessional facilities has also spurted above 50 percent of GDP as external and local bond appetite wanes. The annual fiscal and current account shortfalls will likely exceed 10 percent of output, and utility tariff hikes will keep interest rates above the prohibitive 15 percent precipice.

Armenia’s Conflicted Claim Clusters
2013 October 9 by admin

Posted in: Asia
Armenia joined the Caucasus queue immediately after the US Federal Reserve stayed the easy-money course with a $700 million, 7-year sovereign bond oversubscribed at a 6. 25 percent yield. The foray came as an IMF extended credit facility expired and newly re-elected President Sargsyan pivoted from EU talks to enter the Russia-dominated Eurasian Economic Union, given longstanding natural gas and security ties to face off with Azerbaijan over disputed land. Visa passage discussions will continue with Brussels, as another arrangement may be sought with the Washington-based lender, which just recalculated both GDP growth and inflation at around 4 percent this year. Construction has revived but electricity prices have also risen, on 20 percent credit expansion in the 70 percent dollarized banking system. Food and metal exports have picked up but remittances remain crucial to offsetting the 10 percent of GDP current account deficit and steadying the currency. Donor funding along with international financial market access will help close the budget gap and private pension reform is underway with global asset managers applying for licenses. Efforts to improve in the World Bank’s Doing Business rankings have focused on infrastructure and regulatory modernization in the mold of neighboring Georgia, which was the first from the sub-region to be added to JP Morgan’s NEXGEM index. Eurobond issuance and non-resident deposits have lifted external liabilities to 100 percent of GDP there, according to the Fund’s latest Article IV update. President Saakashvili is preparing to leave office after the opposition led by a wealthy business executive took the prime minister’s post last year ushering in a political standoff. With one-third the population in poverty and 15 percent unemployment, the new team is following through on campaign spending promises such as national health insurance on slower 2. 5 percent economic growth. The central bank has cut interest rates to 4 percent and spent hundreds of millions of dollars of reserves for currency support, as the government has strengthened labor protections and backed a $3 billion private equity fund for infrastructure investment. The Russian market may reopen soon after the post-war trade embargo, but agricultural output continues to lag.

In Central Asia Kazakhstan too plans a $1 billion Eurobond to set a company benchmark as banks still struggle with the 30 percent NPL hangover from the 2008 crisis, which has forced BTA to default twice on foreign debt. WTO accession is expected in the coming months as China’s bilateral natural resource and credit relationship has taken off in recent years. GDP growth and inflation are both at 5 percent, and hydrocarbon FDI and a current account surplus undergird external accounts, with central bank and sovereign wealth fund reserves combined at $95 billion. The exchange rate corridor will add the euro and ruble to the dollar, and all private pension funds will be consolidated in a single pool under official control with outside manager participation as the inherent conflict caused a 10 percent MSCI stock market drop.

China’s Fretful Free Zone Fiddling
2013 October 4 by admin

Posted in: Asia
Chinese stocks finished Q3 barely down as PMI readings remained over 50 and financial services free-trade experimentation was previewed in Shanghai, with greater exchange and interest rate latitude for foreign bank and securities firms still barred from full control. International integration was highlighted by official reporting of overseas commercial debt at $775 billion and RMB trade settlement at one-fifth the total despite continued doubts over invoice veracity after a recent probe into mainland and Hong Kong practices. So-called “backdoor” stimulus through tax breaks and infrastructure projects has sustained the 7. 5 percent GDP growth target, along with still buoyant housing prices and mortgage lending despite repeated cooling attempts. As Asian bond markets reopened in September with the US Federal Reserve’s tapering postponement high-yield property developers continued to be shunned by normal investors, forcing resort to corporate “entrusted” credit which has ballooned on the shadow banking balance sheet next to wealth management products. Local government exposure which was downplayed in the immediate leadership change period regained urgency as regulators fanned out for an urgent national audit ahead of an important November party gathering. Financial statements are not publically available for hundreds of vehicles of the 11,000 estimated which may have already borrowed RMB 20 trillion or near 40 percent of GDP, according to industry calculations. Local raters have downgraded a handful of city bonds, with one-third of issuance now going to repay old obligations, experts believe. Price Waterhouse in its latest survey of top banks cited a 10 percent NPL rise generally the past six months, while S&P noted worsening “liquidity strains” particularly at mid-sized institutions reliant on wholesale lines. A prominent domestic research firm warned that medium-term bad asset accumulation could erase half of system capital, and securitization will likely be on the agenda at the upcoming policy meeting after a small pilot program was approved for offloading state railway holdings. An explicit deposit insurance scheme could also be proposed, and exchange overseers may get further authorization to expand short-selling and other modernization steps.

As the Asian Development Bank cut the regional economic growth outlook to 6. 5 percent with lower export and portfolio flow potential, Korea nudged China’s equity performance as a safe haven play after returning to the sovereign bond market for an oversubscribed post-2009 placement at 115 basis points over the 10-year US Treasury. The won has been firm against the dollar since June as the current account surplus hit a record and housing relief in the new budget aided overstretched borrowers. Second quarter output was up almost 2. 5 percent, and the North’s nuclear threats were sidelined on reactivation of cross-border commerce and talk that inspection overtures could proceed along the lines of Iran’s apparent new willingness to negotiate an end to multilateral sanctions. The Japanese yen, which sets the trade and financial rivalry tone, also bumped off the post-Abenomics bottom as the stock market led the major economy pack despite retail investor recoil at doubling capital gains tax.





The BIS’ Offhand Offshore Debt Detour
2013 October 4 by admin

Posted in: General Emerging Markets
The Bank for International Settlements’ September quarterly review retrospectively hailed record emerging market cross-border lending in Q1 and corporate debt issuance mainly from Brazil and China through offshore financial centers now surpassing the advanced economy total. Asia and Latin America were favored regions, as the Eurozone bottomed and the Middle East/Africa steadied. Japanese banks through headquarters and local units have regained the top international credit position focused on syndicated and trade activity in rapidly-growing neighbors. From end-2012 through March developed world borrowing fell 2. 5 percent or $325 billion, with the US, Europe and Japan all down. German and American banks rank just behind Japan’s in their global share at almost one-quarter combined, and half of the megabanks’ $4 trillion in claims are covered by home deposits. Developing country lines were up 8. 5 percent or $275 billion, nearly 90 percent concentrated in Brazil, China and Russia. Euro area parents increased exposure for the first time in two years. India and Turkey were among other big recipients prior to the capital outflows triggered in May with their outsize current account deficits and private sector debt loads. Argentina and Hungary were shunned on policy interference, while advances rose modestly in Saudi Arabia and South Africa. The emerging economy portion of interbank lending has doubled to close to 15 percent the past five years, two-thirds focused on the Asia-Pacific. Latin America’s contribution has also climbed with US lenders the leading commercial players. As of mid-2013 25 percent of all emerging market external corporate bonds, almost $100 billion on an annual basis, went through offshore administration and tax-advantaged domicile. The fraction was 3 percent above advanced economies, with two-thirds raised from Brazilian and Chinese names. For the latter 15 percent was renimbi-denominated, with energy and property companies prominent.

In its own international capital flow take, Geneva-based UNCTAD described “atypical behavior” since 2008, with investor sentiment instead of economic fundamentals steering allocation within the industrial world’s zero interest rate condition. Currency intervention and inflow controls and taxes have been deployed as portfolio swings in global financial assets triple the GDP level can be destabilizing, according to the agency. Private funding tends to be pro-cyclical and often detached from underlying real productive needs, and it urges greater reliance on domestic securities markets. Basel-type regulatory standards are not a good response for many developing countries that have experienced “sudden stops” despite high capital and liquidity ratios. Domestic demand support should be the credit priority, and state direction and guarantees may be emphasized especially to aid small business and long-term maturity. Central banks that have already conducted unconventional anti-crisis monetary policies should mobilize available tools for unmet commercial purposes and national development banks that once played a key financial sector role could be revived as specialist providers in this peculiar current capital environment, the UN recommends.

Foreign Exchange’s Dizzying Turnover Twist
2013 October 2 by admin

Posted in: Currency Markets, General Emerging Markets
The BIS’ initial findings from its 2010-13 triennial currency trading survey showed the Mexican peso, Chinese renimbi and Russian ruble in the most active tier of daily activity up one-third to $5. 3 trillion. Over 1000 banks and dealers from 55 countries participated, as the share of money center institutions fell to around 50 percent and non-financial corporate customers to under 10 percent. Non-bank insurance, pension and hedge funds have jumped into the swap and spot segments each at $2 trillion, as dollar dominance continues with 85 percent use on at least one side, followed by the euro and yen. Singapore is on the list of biggest centers behind the UK and US, and the Australian and New Zealand dollars also climbed the popularity ranks. The peso leapt into the top ten with a 2. 5 percent portion of global turnover, with offshore access putting the yuan just behind. Prime brokers accounted for 15 percent of transactions, and retail investors represented 3 percent of the total through electronic platforms. FX forwards and options were growth categories, with the former ahead 40 percent to $675 billion over the period. Half of derivatives were longer maturity, between one week to a year, and only $150 billion in all daily instruments was exchange-traded, implying that open interest may be an “inaccurate reading” for general positions. With amounts from $50-70 billion the Turkish lira, Korean won, South African rand, Brazilian real and Indian rupee are in the leading 20 by volume. Hong Kong and Russia are important dealing locations, and Japan and Singapore hold equal weight at 5. 5 percent of worldwide sourcing. A separate tabulation of interest rate derivatives charted a 10 percent advance over three years to $2. 3 trillion, two-thirds in swaps and the rest in forwards. Half the structures were in euro, with the real, rand and ruble also featuring regularly. Exchange activity dropped 40 percent to $5 trillion and in the OTC market the cross-border versus local pairing was 10 percent down to 55 percent.

The three biggest emerging market contracts were $15 billion each this year from negligible sums in 2010. On geographical distribution New York and London again took 75 percent, but the euro concentration increased sales in France, Germany and Denmark. In the Asia-Pacific, Japan edged out Australia, followed by Singapore and Hong Kong. Other sizable developing economy units included the Polish zloty, Thai baht, Hungarian forint, and Chilean peso. China and South Africa had $10 billion in agreements through early 2013, and into next year higher global rates could further boost participation. An exception to the negative exchange-listed trend has already been seen in Brazil, as companies that borrowed heavily abroad belatedly seek hedges. Many were unprotected or in bad derivatives bets in 2008 and had to be aided by government and outside liquidity lines but such contracts may not be renewed for the post-taper crisis.

MIGA’s Guarded Guarantee Gallop
2013 October 2 by admin

Posted in: IFIs
The World Bank’s MIGA political risk insurance arm increased guarantees almost $3 billion the latest fiscal year, bringing the total portfolio to quadruple the amount, as post-crisis focus on Europe’s financial sector turned to capital market support for frontier country infrastructure projects. The agency extended its commercial debt product coverage to include state-owned firms without explicit government backing, in keeping with a development mandate beyond traditional Berne Union private capacity. Over half of business was in Sub-Sahara Africa and oil and gas was the second industry line, with a $150 million facility joining with OPIC for Apache Corporation operations in Egypt. Power investment also featured in two other major deals for a combined $650 million in Angola and Bangladesh where HSBC was the chief lender. One-third of outstanding exposure has been reinsured and no expropriation claims were submitted in FY 2013. On a net basis Central Europe takes a large portion with Croatia, Russia, Serbia and Ukraine each with 5 percent-plus shares, while the biggest African risks are in Ghana and Cote d’Ivoire. The group is also responsible for underwriting transactions in the West Bank and Gaza under a separate international arrangement. Ukraine’s stock market with a 15 percent MSCI loss through September still owes the IMF $8 billion from the previous lapsed accord as prospects for renewal remain remote. Reserves sank another 5 percent in August on repayment and currency intervention to just over $20 billion as a mini-trade war erupted with Russia with the Kremlin trying to pre-empt an EU customs agreement. Candy imports were banned by Moscow on health concerns and steel shipments encountered delays and extra inspections. President Yanukovych wants to enter Europe’s free trade zone despite his Russian counterpart’s objection to the “suicidal move. ” Brussels has first insisted on tariff as well as political and judicial changes, including the possible jail release of opposition party head Tymoshenko. Recession lingers although the corn harvest is up 35 percent putting the country just behind Argentina and Brazil in the world export ranks, with shifts toward Asian and Middle Eastern buyers. Agri-business multinationals have expanded their local presence, with Monsanto just launching a seed production unit, despite slipping global commodity prices.

The chronic budget and current account deficits have worsened this year as the winter natural gas season and the stretch into the next presidential election cycle approach. The central bank is expected to further stiffen rules on foreign exchange surrender and trading as foreign ownership of domestic debt is barely one percent despite double-digit yields. Croatia recently inked an EU partnership as heavy public debt spurred a negative ratings outlook assessment and unemployment touched 20 percent. It will immediately be placed under the excess deficit procedure, but the Finance Minister looks to privatization rather than outside official rescue to mobilize resources. Serbia on the other hand just completed another cabinet reshuffle hoping to regain IMF program access and enlisted former Managing Director Strauss-Kahn as an adviser as both seek image rehabilitation.

Local Bonds’ Belated Backup Bid
2013 September 24 by admin

Posted in: General Emerging Markets
Although foreign ownership of major local bond markets has doubled the past five years to one-quarter of the total, continued heavy outflows in Malaysia, Mexico, Turkey and elsewhere could shift the burden to domestic insurance and pension funds now with $5. 5 trillion in assets, according to JP Morgan’s latest global guide. Latin America’s private plans were the pioneer catalyst in the former segment, while Asia’s life insurers dominate the latter $3 trillion pool with institutional allocation for both steered mostly to government fixed-income. In Europe, first Hungary’s and recently Poland’s state social security takeover will reverse progress, although Warsaw will cancel one-fifth of outstanding debt during the transition. Corporate bonds represent 20 percent of the $8. 5 trillion local amount, and in the first half $375 billion was issued mainly from China with $200 billion. Brazilian activity was down one-third with higher interest rates, while Korea’s number two position remained intact at $40 billion for the period. The market is double the size of the external one but has no dedicated index like the CEMBI and limited foreign access to primary offerings and scant secondary trading. They lack liquidity and cross-border clearing scope but have fit a post-crisis niche for bank subordinated placement to meet Basle standards. Inflation linkers are worth $550 billion, and 80 percent of Chile’s and 40 percent of Israel’s stock is in that form. Domestic debt otherwise is overwhelmingly fixed-rate and in Russia and Thailand 100 percent is this type. This year the category could again see net outflows as in 2008 with EPFR data negative for the past several months in contrast with occasional equity fund upticks. Bid-offer spreads have recently widened on currency baskets, and quarterly domestic instrument turnover has plateaued at around $1 trillion according to industry association EMTA, partially due to new market-maker rules under the Dodd-Frank law. Capital inflow controls as in Brazil and Indonesia have been lifted or relaxed in the current stress as central banks have mobilized $9 trillion in combined reserves to support currencies, with Asian and Latin American authorities most active.

South Africa has refrained with a limited stockpile after unsuccessful interventions a decade ago, but has not ruled out recourse to an eventual BRICS line that could be established as reaffirmed at the G-20 meeting. Monthly non-resident portfolio accounts shun bonds but are long equities, with non-mining listings preferred as the sector endures trikes and waning world prices. Mexico also spurns interference despite the peso’s drop to 13 to the dollar and structural reform jitters following violent teacher clashes with police. Korea in comparison with 2009 has been lower-profile with reduced foreign currency mismatch and a current account surplus double 2012’s figure as high-tech exports rebound with developed economy improvement. Budget provisions have extended mortgage relief and encouraged renter to owner evolution with loan subsidies but household debt loads over 100 percent of income await further backup plans.

Pakistan’s Muslim League Standing Streak
2013 September 24 by admin

Posted in: Asia
Pakistan shares led Asian markets with a 20 percent advance as Prime Minister Sharif’s resounding July Muslim League party victory was followed by quick renewal of a 3-year IMF program up to $6 billion, which could unlock additional bilateral and multilateral support at that same sum to counter the “critical” net negative international reserve position. GDP growth has been “substandard” at 3 percent the past five years, with half the population in poverty and severe power and security difficulties, according to the Fund. Private investment is only 10 percent of GDP with minimal FDI given poor business climate and governance rankings. Inflation has improved to 5 percent but money supply is up triple that amount due to central bank fiscal deficit financing. The current account gap is only 1 percent of output but external debt service and continued currency intervention leave just enough foreign exchange for a month’s imports. The low 10 percent tax revenue ratio, with barely 1 percent of citizens filing returns, along with higher energy subsidies and provincial transfers have swelled the budget gap to 8 percent of GDP. Electricity outages average 8 hours daily and “circular” debt arrears involving state companies were partially cleared as the new administration took office. Bank assets are 40 percent in government paper and NPLs are 15 percent of the portfolio despite good capital adequacy. Armed threats include the war in next-door Afghanistan, sectarian fighting in Baluchistan and street crime in Karachi, and the balance of payments is further at risk from remittance reductions in Europe and the Gulf. With assistance and reform the economy should grow 5 percent next year as the public debt is set on a medium-term 60 percent of output , sustainability path. The central bank with “inadequate” independence has been pressured to cut rates and legislation should establish a separate monetary policy committee. Bankruptcy and deposit insurance provisions are also needed and inspectors must coordinate with securities counterparts on consolidated oversight, the Fund staff believes.

Corporate bond and sharia-compliant products are underdeveloped and government debt could be listed on the stock exchange for better liquidity. Such practical steps may avoid the fate of the previous 2008 arrangement, which failed on overreach and lack of immediate momentum, according to an internal review. The changes should allow for additional social spending to cover school and health costs, as the commercial framework is overhauled by one-stop foreign investment facilitation and privatization of loss-making state firms. Gulf countries and the Asian Development Bank are on board with early direction and Chinese backers continue to express interest in hydroelectric projects. They recently hailed prospects in nearby Sri Lanka, which has avoided a Fund return and been criticized by the UN for civil war human rights abuses. Growth and the trade deficit have held steady on a “B” sovereign rating as banks plan to float bonds abroad to spice domestic market liberalization.

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Asia’s Irrepressible I-Rate Sentiment
2013 September 20 by admin

Posted in: Asia
Through August India and Indonesia were unshielded by BRIICS protection as they led regional currency and capital market falls with stocks off 20 percent on the MSCI. Lame duck governments could not inspire confidence despite changes in central bank personnel and policy, as corporate leverage and refinancing needs raised anxiety against the tougher external funding and economic growth backdrop. For both countries current account deficit and short-term debt requirements absorb 90 percent of reserves, which in turn are off over 10 percent on regular exchange rate intervention with the rupiah below 10,000 and the rupee, 65 to the dollar for post-crisis bottoms. Government bond auctions have failed on postponed fiscal adjustments and new spending plans, including tax breaks for labor-intensive Indonesian investment and a sweeping Indian food subsidy to fight hunger nationwide although geographic and rural-urban concentrations differ. In Jakarta state pension funds and enterprises were ordered to buy shares and Bank Indonesia has embarked on consecutive 50 basis point rate hikes. Foreigners liquidating fixed-income positions have complained of dollar access delays and official price interference, as backup swap lines are reinforced through the regional Chiang Mai initiative dating to the 1990s Asian crash aftermath. The GDP growth forecast has slipped under 6 percent and inflation may touch double-digits on higher fuel costs and currency depreciation. Scandals have erupted at the oil regulator and anti-corruption commission to underscore the poor governance ranking, as military and business establishment figures are early candidate favorites along with Jakarta’s dynamic provincial head. With company earnings slumping, P/E ratios have descended to the core market average and despite recent rapid consumer credit expansion banks are “resilient” with good capital adequacy and NPL measures, according to Fitch Ratings.

Indian stocks have also lost their typical premium but foreign investors remain net sellers with the big conglomerates owing $20 billion in external debt through year-end, with a total of $170 billion to be repaid by all private and government borrowers by next March. Expatriate deposits will be sought to help bridge the gap and dedicated dollar facilities were established for energy imports to ease rupee tension. In his inaugural speech central bank chief Rajan described the economy as “fundamentally sound” as he promised to revive the original financial services modernization agenda which accompanied Prime Minister Singh’s coalition re-election. As he appeared before parliament to promote long-term infrastructure facilitation and opening his ministerial team acknowledged that both domestic and global factors were to blame for the immediate crisis slashing GDP growth to 4. 5 percent. Dr. Singh predicted exporters could benefit from better competiveness at the same time the vaunted offshore services industry reported record shrinkage. Returning Finance Minister Chidambaram has tried to stay above the fray as he announced multi-point strategies for budget and trade deficit reduction and limited the rice transfer program with popular anger of all varieties raging.

The Middle East’s Suspended Syria Senses
2013 September 20 by admin

Posted in: MENA
Regional capital markets tentatively retraced as a US-threatened military operation against selected Syrian targets was put on hold pending a proposed agreement with ally Russia to relinquish chemical weapons to international control, as political and geo-political tensions continued to simmer. Egyptian stocks trimmed their year to date loss to 15 percent as the army roundup of Muslim Brotherhood leaders intensified following President Morsi’s ouster and the next transition phase considers an outright ban on the group more severe than during the Mubarak era. The constitutional committee will resume work with participation from the Salafi party whose Islamic credo is stricter, and the specific timetable for upcoming elections has yet to be determined with the general in charge of the interim government touted as a potential candidate. Foreign exchange reserves have stabilized at around $18 billion, and the pound at 7 to the dollar, on $12 billion in combined loans, grants and oil shipments from Kuwait, the UAE and Saudi Arabia, where shares are solidly positive paced by the Emirates’ 50 percent gain. However the infusion may be diluted by the potential withdrawal of $5 billion in aid from the EU and $1. 5 billion from the US in response to the violent takeover and opposition crackdown, which also resulted in the resignation of initially-designated prime minister El-Bareidi. Fiscal consolidation slipped from the agenda with the Gulf inflows despite the near 15 percent of GDP deficit the past year as a stimulus package was announced following a July interest rate reduction. Domestic debt/GDP stands at 80 percent and long-term bond yields still approach 15 percent with further bank absorption capacity limited under capital and earnings squeezes. The other MSCI core member Morocco was off by similar magnitude as a centrist party prepared to join the ruling coalition after Islamist exit in protest of lower fuel subsidies under the precautionary $6 billion IMF program. Modest progress was cited in the latest Fund review on curtailing the budget and current account gaps as debt servicing costs rose 10 percent annually. A sovereign Eurobond was issued in late 2012, and Jordan and Tunisia will mobilize bilateral and multilateral guarantees to tap the external market should the global window soon reopen.
Lebanese shares have only shed 10 percent through September despite their front-line Syrian civil war entanglement underscored by a recent GCC-circulated travel warning. Kidnappings and sectarian incidents have jumped as negotiations over new cabinet formation are stalled and complicated by the EU’s branding of Hezbollah, which sides with the Assad regime, as a terrorist movement. Both GDP growth and inflation should end 2013 at 2 percent as tourism and food prices recede. Israeli equity results were better on quarterly output expansion at double that clip as offshore natural gas production began. Consumption is expected to flag into year-end on a higher VAT, as the shekel continues to hold up despite postponement of central bank head succession after several aborted searches.







China’s Liberalized Capital Account Interpretation
2013 September 16 by admin

Posted in: Asia
As Chinese equities regained footing in August, especially against more precipitous neighboring exchange falls, on a PMI reading above 50 preserving the 7 percent GDP growth consensus, investors looking for further support emphasized the prominent but abstract capital account liberalization nod in the latest 5-year plan offered by the new leadership. A recent IMF empirical model based on 40 developing market experiences projects a 3 percent of GDP range medium-term rise in both inflows and outflows. Portfolio allocation remains subject to strict quotas only used to the same regional extent in India. For the main QFII regime the ceiling was hiked to $150 billion in July, and the R-QFII offshore renimbi cap reached RMB 270 billion. The outward QDII channel has also opened but is distorted by domestic interest rate and bond market controls. The regression results estimate a 20 percent of output increase in Chinese assets abroad over time, double the jump in foreign inward capital. Reserve accumulation will drop one-third and the additional stake could come to one-quarter of MSCI emerging market universe size. A $500 billion dollar bond shift in turn would decrease EMBI yields by 250 basis points. The redeployment would drain liquidity from housing speculation and “shadow” wealth management products available from banks and non-banks in the overall interest of financial system modernization, the assessment concludes. Outbound direct investment could likewise outpace the $10 billion/month current FDI figures up 7 percent from 2012 led by the service sector. The strong interest overrode fears of regulatory interference following a crackdown on alleged abuses in the pharmaceutical and consumer goods industries and anti-monopoly investigations. Resident consultants who act as matchmakers and researchers for joint ventures were spooked by the arrest of well-known operators who confessed to the media private data breaches. The moves may also have been designed as indirect retaliation for the slow approval process on a proposed Mainland company takeover of a US major pork producer after Huawei’s high-tech acquisition was rejected by a Treasury Department-headed committee.

The Shanghai exchange recovery was magnified briefly by a trading error at Everbright Securities lifting the local index 5 percent. The firm received harsh official warnings and has otherwise been implicated in a global probe into professional hiring practices which may have involved improper government relationships. JP Morgan has been cited as one institution in the crosshairs as Beijing tries to lure overseas funds and expertise into the four big bad asset management firms preparing for another uncollectible loan buildup. UBS and Standard Chartered participated in Cinda’s 2010 Hong Kong listing and Huarong may be next. Only half the original RMB 1. 5 trillion absorbed has been recovered at around 20 percent cash value. Both state and private banks reported credit deterioration in the last quarter, echoing an S&P alarm on a “large corporate debt hangover” by conservative rendering.

The IIF’s Staggered Structural Reform Strictures
2013 September 16 by admin

Posted in: General Emerging Markets
The IIF’s September Capital Markets Monitor stifled the noise from the Fed’s “taper tantrum” to reiterate a call for structural and growth model changes previously “masked by abundant global liquidity. ” In the near term major emerging markets’ 10-20 currency depreciation should aid exports with industrial economies stabilizing as reflected in PMIs, and equities at a P/E ratio below 10 are cheap historically as EMBI spreads have also widened 100 basis points recently to reset relative bond risk and reward. Combined asset class fund outflows through August at $50 billion were around one-quarter of the past year’s influx. The worst-hit countries depend on external current account and public and private debt finance at the equivalent of 10-25 percent of GDP, including Indonesia, South Africa and Turkey. Exchange rate falls in India and Brazil have increased inflation and central banks have intervened and raised interest benchmarks in response, but a full-scale Asia-type crisis as in the late 1990s is unlikely with greater regime flexibility and reserve positions, the group believes. However commodity-reliant states like Russia and Saudi Arabia must rebalance internally, while China’s approach shifts from net exports and fixed investment as pledged by the new leadership. This agenda has been diverted and distorted by years of double-digit credit growth which now must be unwound with debt/GDP levels above 100 percent in several cases not due to central government but to bank and company borrowing. Non-performing company and household loans are up and future servicing ability is due to worsen, according to the last quarterly survey. In China total social financing including the shadow system rose 30 percent in the first half, and big city housing prices climbed at half that pace, as cooling efforts were offset by the need to preserve 7 percent minimum output expansion. India’s mostly unhedged dollar-denominated corporate debt burden stands over $200 billion with 4 percent economic growth the lowest since the 2009 crash. Brazilian private credit has advanced 20 percent annually over the past decade, and households face a steep servicing/income ratio, 5 percent above US families at the post-Lehman crisis peak, with 50 percent rates on short-maturity loans.

Euro area calm over the summer has sparked global securities appetite for both core and periphery offerings on the assumption that imminent German elections will result in policy continuity regardless of coalition composition, and that the European Parliament will pass single-supervisor legislation for the ECB as it conducts regional stress testing. For banks lacking sufficient capital, the EUR 60 billion set aside in the ESM could be tapped, but regulators seek a larger facility to avoid repeats of the Ireland and Cyprus rescues in particular. The former after nationalizing the largest institutions has yet to allow family mortgage foreclosures to boost asset recovery, and in the latter deposits were off 30 percent in August with capital controls extended indefinitely in the stricken structure.

Kenya’s Public Tribunal Trot
2013 September 12 by admin

Posted in: Africa
As Kenya’s deputy president Ruto goes before The Hague on human rights abuse charges, equities were up 25 percent on the MSCI index through August among Africa’s frontier leadership as the Finance Ministry pushed for a regional record size $1. 5 billion maiden sovereign bond issue. Neighboring Tanzania, which already managed a private placement, also intends to join the public queue in the near future and get a credit rating, and both instruments are expected to yield around 8 percent with the proceeds headed for infrastructure projects. Sub-Saharan external offerings have been over $6 billion this year, with Ghana and Nigeria slipped through a narrow window the past three months. A dozen countries from the continent have debuted since 2007, most recently Rwanda and Zambia with average ratings in the “B” range. Nigerian government paper has been the main domestic play after entering the JP Morgan benchmark as a minute weighting but foreign investors have turned wary as the naira drops from its dollar fluctuation band despite regular central bank intervention. They previously shed Ghanaian holdings on whopping fiscal and balance of payments deficits, and presidential election outcome uncertainty just dispelled with a Supreme Court ruling validating 2012’s squeaker result. Asian and Mideast buyers have joined traditional European and US portfolio inflows to support the securities boom and Chinese officials visiting Nairobi last month emphasized their companies were now the top FDI source. Both GDP growth and inflation are at 5 percent with the central bank’s rate stance on hold following a recent spike in 3-month T-bill yields. Better rains should bolster agriculture, and tourism had begun to revive before the big fire at the Kenyatta air terminal which should not cause lasting damage according to officials. The financial sector contribution has been minimal on slack credit demand as stockbrokers prepare for their own pain with imposition of a 15 percent commission VAT. With natural resource discoveries new legislation has been proposed for oil and mining joint ventures, with employment and revenues to go to surrounding communities and royalties to be placed in a separate sovereign wealth fund.

All MSCI frontier Africa members remained positive into the Q3 close including Zimbabwe which maintained a 10 percent advance after the immediate correction on President Mugabe’s resounding re-election win and judicial refusal to consider opposition party cheating allegations. The incumbent claimed “resurrection” after taking two-thirds of parliament seats and 60 percent of the vote and pledges to forge ahead with full implementation of the “indigenization” policy of majority local control which thus far has relied on voluntary commercial terms. The government expropriated and redistributed farms in the past and foreign banks may be soon pressured further after calls during the campaign to expand business and household credit. The still manually-traded stock exchange has already delisted powerful conglomerates like Cairns which went bankrupt during the state’s long anti-free market crusade.

The US Treasury’s Foreign Portfolio Fixtures
2013 September 10 by admin

Posted in: General Emerging Markets
As continuously tracked fund flight accelerated for a third month into September, the US Treasury published its preliminary annual survey of portfolio investment abroad charting a $1 trillion increase to almost $8 trillion as of end-2012. The breakdown was $5. 3 trillion in equity and $2. 3 trillion in long-term bonds, with the remaining $365 billion in short-term debt. Of the thirty countries itemized Brazil, Korea and Mexico finished in the top half receiving $150-200 billion each and China, India, South Africa and Russia took individually from $70-$120 billion. Stocks dominated for these listings and Brazil’s bond allocation also led at $65 billion. Europe, Japan, Canada and Australia were the chief destinations overall, and offshore centers in the Caribbean included could be tapped for both tax-advantaged developed and emerging market holdings. Israel and Singapore were high-income targets falling between categories, and Taiwan ranked just behind the Mainland with $90 billion entirely in shares due in part to its large MSCI weighting. The core European component is expected to strengthen this year with recession ending and the supranational Stability Fund now able to sell 20-year paper at 3 percent on good demand despite the sustained regional drop in private lending. Among the peripheral members under aid programs Portugal returned to growth in the last quarter as it prepares to rely again on commercial borrowing in 2014, although a precautionary package is widely expected before that date with debt/GDP well over 125 percent. Olive oil exports rebounded as the government coalition scrambled to stay intact with court rulings against the constitutionality of public pension reductions. Iberian neighbor Spain has a large stake in the outcome with major banks’ cross-border debt exposure as they grapple with double-digit NPL ratios. Summer tourism picked up there, and although residential property sales are off over 60 percent since the crisis foreign distressed asset firms are now negotiating to acquire chunks of the centralized disposal agency portfolio.

In Emerging Europe Hungary, Poland and Turkey have yet to appear in the US Treasury tabulation outside the rest of world broad grouping. According to central banks in the first two, foreign investors own 35 percent of local debt and have been unfazed by plans to convert hard-currency mortgages and private pension schemes. Turkey’s benchmark bond yield on the other hand breached 10 percent, and the lira 2 to the dollar, as non-residents shed $1 billion per month paring their position to under 30 percent. The monetary authority refuses to raise interest rates outright and claims a box of “special tools” within reach should regular interventions which have helped drain reserves 15 percent not reverse the tide. Short-term mainly private obligations are greater than the current $40 billion pool, and the damage from global military action against Syria may compound the existing refugee and trade crunches in a more sobering survey.





Commodities’ Crude Cresting Crease
2013 September 10 by admin

Posted in: General Emerging Markets
After a prolonged slide on signs of a “super cycle” peak and China moderation to 7 percent GDP growth, the GSCI commodities index has outperformed standard emerging market benchmarks with oil and gold spiking on the latest Mideast geopolitical confrontations. Mainland PMI readings again over 50 have dispelled chronic “hard landing” fears with natural-resource oriented South-South trade now one-fifth of the total, according to the IMF. In Asia, Indonesia’s current account imbalance swelled on Beijing’s coal import ban, and analysts calculate that three-quarters of recent Latin American economic expansion was due to raw material sales. In Brazil, the US was displaced as the top trading partner, and half a dozen other countries in the region depend heavily on Chinese agricultural and metals demand. Africa is also energy and mining axis with $200 billion in bilateral commerce and the Export-Import Bank is its largest creditor. Gold was down 25 percent in the first half, and India as a huge buyer just announced new curbs including a tax surcharge to limit the balance of payments toll. Central banks have boosted that component in reserves since the 2008 crisis, with Venezuela becoming a top holder when it allocated 70 percent to snub both the dollar and euro. As developing markets move to defend their currencies illiquidity has hobbled ready access although safe haven value has recovered amid continued strife in Egypt and preparation for an international military strike in Syria in response to documented chemical weapons use. The strategic implications have likewise restored oil prices to above $100 /barrel as the assumption often in major exporters’ budget planning. GCC markets nonetheless have been bruised by looming armed action with the UAE trying to maintain its 50 percent frontier gain position before transitioning to the MSCI core index.

Thus far the commodity blip has not revived the food and fuel price panic of five years ago bringing widespread social unrest and IMF emergency aid and reigniting inflation. Bond and equity fund outflows doubled in the week the US and Western allies readied for conflict with Damascus, with the EPFR-tracked universe at $1. 5 trillion. Both traditional and ETF stock vehicles dominate, but the main MSCI benchmark lost over 10 percent through August despite record low valuations. For fixed-income a quarterly Fitch survey of European investors pointed to deterioration for corporate issuers in particular, with one-third citing refinancing risk. Central Europe, especially Hungary and Poland, have escaped the worst of the exodus despite their dual implication in the Eurozone mess as upcoming German elections herald summer’s end. The candidates there already acknowledge Greece needs to cover another EUR 10 billion immediate shortfall and Cyprus will not lift capital controls soon as its recession worsens. In France officials conspicuously cut summer breaks but were less severe with state pensions, where eligibility and benefits under reform will draw from the same essential stockpile

Global Capital Flows’ Forever Fluctuations
2013 September 4 by admin

Posted in: General Emerging Markets
With policy-makers again slamming “hot money” developing market outflows in a possible replay of multi-asset class crisis, the IMF published a paper asserting that capital movements for all economies have been “fickle” over the past three decades. The “roller coaster” has been similar both in gross and net terms since 1980, although the latter have been more stable for advanced countries with emerging market outward investment only accelerating recently by historic comparison. The analysis applies statistical regressions to find standard deviations and persistence in a common range, with EM volatility falling incrementally. FDI is steadier than portfolio allocation, but debt and equity and bank lending directions overlap. Risk aversion and interest rate measures show that volume rises in easy monetary conditions equal to 2 percent of GDP for that group. As domestic residents diversify abroad two-way fluctuations may diminish as a “natural hedge” as traditionally greater foreign funding fades, according to the research. For almost half the 145 countries tracked quarterly data are available and isolate private from official versions. Including the second type would be misleading since that source in Greece compensated for the sharp commercial collapse as its sovereign crash began. Gross developing market flows quintupled over the period to 12 percent of GDP prior to 2008, and bank credit led the swings since although even FDI has reversed. The monograph points out that the figure has dropped in the past five years partially due to the large financial institution share. Pro-cyclicality has been mild with increases associated with higher economic growth and accommodative monetary policy but stress as reflected in sentiment indicators and benchmark instrument spreads can negate the pattern. Risk shifts correlate most closely to bank involvement and co-movement holds as well for industrial country destinations. The examination stops short of classifying institutional versus retail participation, with separate EPFR numbers underscoring triple the fight out of bond funds for individuals as a proportion of original commitments this year. Both local and hard-currency debt has been shed for months with equity barely positive selected weeks.

Stock markets despite average single-digit price-earnings ratios have however lagged in the performance sweepstakes, amid predictions that the sovereign EMBI and corporate CEMBI may end just flat for the year. At mid-August Asian exchanges amplified the previous BRIC swoon as India was in the crossfire for that cohort. As the new central bank chief was poised to press dusty reform recommendations, the rupee descended past 65 to the dollar as capital outflow controls were imposed and big family conglomerates scrambled to handle external borrowing exposures. Indonesia’s shared current account deficit predicament heading into the election cycle drew investor ire, as state pension funds were ordered to buy shares. Former favorites the Philippines and Thailand were shunned as officials denounced “herd” exodus. Bangkok reported a recession for the last quarter, and the Manila bourse was closed for days from typhoon damage accompanying fund manager wreckage.

Australia’s China Luck Longing
2013 September 4 by admin

Posted in: Asia
Australia headed into September elections with Labor under restored Prime Minister Rudd trailing the opposition, as interest rates were cut again with the GDP growth forecast at 2. 5 percent and the local dollar at a 3-year low on iron ore prices off 20 percent on wilting Chinese deliveries. Headline inflation too is at 2. 5 percent on flat credit extension despite rising home values in major cities. Rater S&P recently calculated that 7 percent economic growth on the mainland would have a strong knock on effect on natural resources, mining and housing and that a “hard landing” could result in sovereign downgrade. Bilateral trade accounted for 8 percent of output last year and a business task force recommended that stepped-up infrastructure investment at half that amount could help offset medium-term commodities decline. Services represent three-quarters of national income but the central bank has been on watch for property overheating as banking and tourism struggle to maintain balance. The continent pursues the same hydrocarbon backstop of adjacent Papua New Guinea where a $20 billion Exxon-Mobil natural gas pipeline is due to go on stream in 2014 to sustain 6 percent growth. The Prime Minister there was re-elected in 2012 and has reduced traditional foreign aid reliance to one-tenth of revenue. Metals exports have been the main commercial drivers, and the Chinese and Japanese are the contracted gas buyers. Gold has suffered from market tumbles as Australia’s Newcrest was forced into a $3 billion write-off of its Lihir project. A sovereign wealth fund attempts to manage resource flows and diversify the economy but has stumbled on corruption and poor governance. An estimated 90 percent of the island population is unbanked despite mobile platform strides. Agricultural operator New Britain Palm Oil is dual listed on the London and Port Moresby stock exchanges and recently received a Malaysian competitor takeover offer. Hydropower and consumer goods are nascent sectors and electronic settlement was introduced last year. Government bonds may be added to the bourse as secondary trading develops and ties with leading trade partner Australia may be smoothed with a temporary asylum review agreement for boat-traveling migrants. A double-tax treaty applies with Indonesia as ASEAN outreach continues, but overseas business executives are deterred by the high costs and precarious security of the capital where violent crime ranks with war zones elsewhere.

Pakistan has been the outperforming Asian MSCI frontier member up 25 percent at end-July on the return of economic reformer prime minister Sharif who immediately inked a new $5. 5 billion IMF loan to staunch reserve bleeding. The budget deficit for the latest period was double the 4. 5 percent of GDP target and better tax collection and state enterprise privatization are designed to achieve the goal over three years to also allow for increased energy capacity. The Karachi stock market vaulted initially on fiscal amnesty replacing a bar to ill-gotten fortune.

Haiti’s Ineluctable Election Tremors
2013 August 30 by admin

Posted in: Latin America/Caribbean
As its post-earthquake IMF program ends with a request for a year extension, Haiti is finally gearing up for long-postponed senate and municipal which may further erode the President’s lack of majority support for priority economic legislation with structural reforms already blocked. The fiscal year 2013 GDP growth forecast has been halved to 3 percent on weather-related agricultural drag on inflation double that number. Trade has gone into deficit but aid and remittance inflows pushed reserves to five months import coverage. The currency has depreciated slightly against the dollar and the central bank has raised non-gourde reserve requirements to redress the trend and mounted $100 million in interventions recently. Private credit expanded 25 percent through mid-year from a low base with the average bank capital adequacy ratio at 15 percent. The budget gap is over 5 percent of GDP with government debt kept below a 30 percent ceiling under domestic and external borrowing, including through Treasury bill and Venezuela’s Petrocaribe oil purchase facility. Tax collection has lagged, energy subsidies are costly, and a debt management strategy is absent, according to the Fund’s latest inspection, which also encouraged greater exchange rate flexibility and trading competition. The financial sector still lacks a collateral law, commercial and supervisory regimes for insurance and microfinance, and stock exchange plans which could align with the cross-border Caribbean platform. The Dominican Republic bourse on the same island features corporate fixed-income listings as another possible link, as the sovereign placed a $1 billion external bond in April without IMF arrangement renewal. With the infusion reserves hit $4 billion on the way to the goal of meeting three import months. Economic growth is around 2 percent on solid tourism performance and lower interest rates. Gold finds have boosted exports, but mining rule shifts may alienate foreign companies and undermine the effort to achieve public sector fiscal balance by mid-decade. Electricity shortages remain chronic and the central bank has yet to be recapitalized despite a 2007 enabling law.

Trinidad and Tobago was ahead 15 percent on the MSCI frontier index at end-July on lackluster 1 percent GDP growth and 2 percent inflation, with the hydrocarbon-backed current account surplus conspicuous at 10 percent of output. Government debt is around 40 percent of GDP after the rescue of pan-Caribbean insurance giant CLICO, but banks remain liquid and can readily absorb primary bond issuance. Barbados in contrast was recently downgraded with its 100 percent debt load deterring further overseas taps. Honduras also fell into that category in February as it launched a maiden $500 million issue now yielding about 10 percent. Former President Zelaya’s wife leads in preference polls to succeed him in November and has pledged additional social and security spending. Violent crime there is among the hemisphere’s worst to further rattle the shaky story.

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The Slovak Republic’s Spark Sputters
2013 August 30 by admin

Posted in: Europe
Non-residents owning almost half of Slovak Republic local bonds, three times the corresponding Czech Republic share, turned wary ahead of elections in top trade and auto manufacturing partner Germany to push yields toward 3 percent as the IMF also lamented “lost momentum” in its Article IV update. The net international investment position in negative terms almost equals external debt at 70 percent of GDP, and economic growth will be under 1 percent this year under flat exports and domestic consumption, the latter due to bank and fiscal retrenchment and double-digit unemployment. FDI has tied car production in particular closely to European and global supply chains with plants concentrated in the higher-income western region. Labor mobility is hampered by steep taxes and poor training reflected in low scores relative to other EU members on the World Bank’s Doing Business rankings. The 2013 fiscal deficit target is 2. 9 percent of GDP to escape from the “excess” monitoring procedure as bank and corporate income levies were raised and local authority spending was trimmed. Gross government debt approaches the 57 percent of output which triggers automatic large budget adjustments as with Poland’s constitutional provision. The Fund recommends better VAT and customs collection and pension changes extending the retirement age to avoid this outcome. Foreign bank subsidiaries dominate as elsewhere in the region but are funded from local deposits rather than riskier parent lines. Two-thirds of the ECB’s long term facilities were repaid in Q1 and capital adequacy and nonperforming loan ratios are solid. Household credit continues to expand but corporate portfolios have shrunk as falling real estate values dampen mortgage activity. As the single supervisory mechanism goes into place most of the system will be overseen from Frankfurt but the national regulator still lacks desired intervention powers, according to the annual report. Political controversy dogged the new entrant’s mandatory contribution to the ESM sovereign rescue fund but has paled against the recent government resignations and scandals next door in Prague. Foreign investors with a 15 percent domestic debt stake remain underweight with the constant reshuffling and criminal investigations despite official end to recession.

In Central Europe Romania, after joining the JP Morgan index, has jumped to third place at over 20 percent after Hungary and Poland. Its stock market has been the lone positive performer in the group after a new precautionary standby accord was reached with the IMF. Central bank currency intervention has been more restrained and long-delayed infrastructure and utility privatizations may be imminent. The private pension pillar could be strengthened there at the same time Warsaw intends to follow Budapest in reverting to state social security control and eroding the internal institutional investor base. Money may also be diverted from Turkey as it experiences the worst Emerging Europe securities exit after alleged military coup plotters were next in receiving Erdogan administration wrath with extended jail sentences further choking the allocation engine.



Kazakhstan’s Temperamental Tenge Outbursts
2013 August 29 by admin

Posted in: Europe
Kazakh shares were down 10 percent on the MSCI Frontier index amid a spotty “popular capitalism” push and continued devaluation rumors dismissed as “groundless” by central bank chief Marchenko with the oil price rebound above $100/barrel versus the $90 budget assumption. A 20 percent drop to 200 tenge/dollar was speculated with GDP growth and inflation both around 5 percent, and the Chinese state petroleum company just offering $5 billion for a stake in the huge Kashagan field. The benchmark interest rate held at 5. 5 percent as capital adequacy at almost 20 percent of assets continues as a lone positive banking system indicator with the aid of government support against repeated commercial debt restructuring rounds and an NPL portfolio estimated at one-third the total. In the non-bank category the dozen pension funds managing $20 billion which are key institutional investors will be pooled and placed partially under official control to aid in achieving divestitures of the sovereign wealth fund which began last year with the $400 million listing of the oil pipeline operator. An airline flotation also designed to appeal to the broader public was recently postponed over legal controversy, and many potential individual subscribers remain wary of corporate governance after fraud allegations at London-listed resources giant ENRC. The new head of the unit is a former provincial governor close to septuagenarian President Nazarbaev who celebrated the 15th anniversary in July of the groundbreaking for the political capital Astana. With no designated successor after two decades in power, he has fallen out with family members and Italy agreed to extradite his fugitive son-in-law charged with malfeasance causing BTA’s 2008 collapse. Ukrainian banks are also in trouble reflected in stock market decline and a 30 percent bad loan load, as Fitch downgraded the ratings outlook to negative on standoff with the IMF with big external repayments looming. GDP is barely growing on steep fiscal and current account deficits, and international reserves shrank 20 percent the past year to cover only two months imports as currency restrictions were imposed to maintain the quasi-peg. Winter will again underscore the toll from subsidized gas purchases and Russia’s Gazprombank credit terms could be harsher. State bills and employees have gone unpaid for months sparking protests with opposition leader Timoshenko still in jail and unable to contest 2015 presidential elections.

Slovenia has NPLs at half the level with domestic interest rates the highest in the Eurozone after Greece and Portugal at almost 5 percent. The central bank’s latest stability review warned of excessive external wholesale funding reliance and corporate leverage with little outlet through the “illiquid and shallow capital market” even with the MSCI component up 10 percent. As transfers to a separate bad bank are due to begin pending audit results acceptable to the European Commission, a wealthy Croatian entrepreneur was finally allowed to buy state-run retail chain Mercator after previous privatization tries leaving a bitter aftertaste with longstanding creditors and workers.

Mexico’s Encoded Energy Endurance Marker
2013 August 29 by admin

Posted in: Latin America/Caribbean
Mexican shares teetered on the positive cusp as President Pena Nieto proposed the PRI party’s long awaited constitutional revisions for oil monopoly Pemex’s private joint ventures calling for profit but not production-sharing following the opposition PAN’s tabling of more ambitious departures. Bills will soon be presented and debated in the Congress after July offshore exploration blocks received few bidders with crude output down to 2. 5 million barrels/day on near exhaustion of the current biggest field. Gas is also promising but transport pipelines must be built for internal and external use. The amendments to three articles uphold the historic principle of official control while aiming to boost paltry FDI in the sector at 1 percent of GDP to compensate for budget revenue loss. Fiscal reforms to alter the relationship between the central and state governments in terms of taxing power and automatic transfers have been introduced at the same time which could pare gas subsidies and invite a subnational bond wave. The leftist PRD may break with the post-election multi-party pact to challenge both intentions, as the under 50 PMI reflects lower growth expectations reverting the peso to the 12. 5/dollar bound. It also insists on a wealth tax to address income inequality, which was a prominent issue during the presidential campaign along with unemployment now formally at 5 percent. Inflation in contrast has improved despite currency depreciation and is within target range but after a minor rate cut the central bank’s room is cramped by likely incremental tightening by the Fed in the coming months as reaffirmed in recent pronouncements. Foreign investors have kept their 50 percent ownership position in long-term local bonds with the exchange rate and monetary stability compared with neighbors.

Argentina’s hyperinflation and capital controls mark the opposite extreme, but President Fernandez exhibited a pragmatic streak in signing a $1 billion deal with Chevron on the anniversary of YPF’s expropriation of Repsol’s stake. Currency and tax privileges unavailable to other multinationals were granted on the eve of provincial elections where her coalition was battered with only 25 percent support and lost in Buenos Aires against a likely 2015 presidential candidate. The equity market is up over 10 percent on the MSCI frontier index outpacing core rivals, and sovereign bond spreads above 1000 basis points have begun to tempt underweight fund managers despite the lingering holdout judicial battle which may be considered by the Supreme Court after a New York appeals tribunal verdict. The US and IMF demurred but France has submitted a brief to the highest Washington panel seeking interpretation of the near 40-year old Sovereign Immunities Act in the dispute. The administration continues to earmark reserves which are off 20 percent for external debt repayment, and GDP warrants are also on track to trigger this year with reported growth above 3.